With an increasingly volatile macro-economic outlook, we believe investors are still likely to stick to defensive yield plays like REITs. While we do not expect a broad-based outperformance from the S-REIT sector, stock-specific catalysts should find favour with investors.

The demand-supply 2019F outlook for most of the sub-segment of REITs is positive, and will help mitigate the threat of rising interest rates. Inorganic DPU growth is also expected from the acquisitions REITs have made in recent years.

The sector is relatively well equipped in terms of balance sheet hedging, to mitigate rising interest costs.

Among the sub-sectors, we prefer the industrial and hospitality REITs, as they are well-poised to tap into demand growth.

Valuations are closer to mean.

S-REITs (average) are currently trading at a 390bps yield spread to the Monetary Authority of Singapore’s 10-year bond yield. To compare, the 10-year average mean spread (ex-Global Financial Crisis) stands at 400bps. In terms of P/BV, the sector is now trading at par to the 10-year average mean of 0.98x (see Figure 96 & 97 in the PDF report attached).

While valuations are closer to mean, we do not think they are stretched – as S-REITs tend to trade at a premium when the growth outlook is positive. Additionally, S-REITs still offer the highest yields and yield spreads over 10-year government bond yields, among REITs globally (see Figure 98 in the PDF report attached).

While the latest en bloc cycle has resulted in liquidity injections of ~SGD19bn (en bloc sales in 2017-2018), the bulk of these proceeds is still not received. Post recent cooling measures – based on our anecdotal observations – most en bloc sellers are either taking a longer time (the wait-and-watch approach) or considering downsizing before buying another property.

With S-REITs being a favoured investment option among high net worth individuals and retailers, there is a good chance the excess liquidity could flow into relatively defensive REIT counters.

Balance sheets in a better position to mitigate rising interest costs.

On average, close to 80% of REITs’ debts are hedged, with only < 20% of total debt due for renewal up until 2020 (see Figure 100 in the PDF report attached).

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